HELP...LLC Basis Limitation

[sray0713]

I hope this is a no brainer type question for someone out there. I am working on an LLC 1065 and the person is dealing in rental real estate and of course with depreciation and all there are losses, sizable losses and the tax payer wants those losses to offset against their earned income on the 1040. Well, I keep running into the basis limitation section and thus none of the loss is pulled into the 1040. (using Lacerte tax software if that matters to anyone) I am a CPA but am a CFO by day and I do this at night for good friends. So, I need a "reader digest" version of basis limitations and how can I get this to work for the tax payer; it seems to me to be possible, so I think there is something I am missing. Any thoughts on what I need to look at to get this loss to pass through to the 1040, is it at-risk basis, or some other angle; what am I missing here? Thank you all for your help, if you need additional information, please let me know!!!

[JoshinNC]

A couple of questions, and possible answers:

I hope this is a no brainer type question for someone out there. I am working on an LLC 1065 and the person is dealing in rental real estate and of course with depreciation and all there are losses, sizable losses and the tax payer wants those losses to offset against their earned income on the 1040. Well, I keep running into the basis limitation section and thus none of the loss is pulled into the 1040. (using Lacerte tax software if that matters to anyone) I am a CPA but am a CFO by day and I do this at night for good friends. So, I need a "reader digest" version of basis limitations and how can I get this to work for the tax payer; it seems to me to be possible, so I think there is something I am missing. Any thoughts on what I need to look at to get this loss to pass through to the 1040, is it at-risk basis, or some other angle; what am I missing here? Thank you all for your help, if you need additional information, please let me know!!!

1. You said "LLC 1065 and the person is dealing in rental real estate". If it's only one member there is no 1065. The only option is to report on Sch. E 1040, or corp return (bad idea with real estate) if the election was made.

2. I don't use Lacerte, but you should have a box to check somewhere on your data entry for at risk on the K-1 screen. Make sure that the box is not checked as a not at risk activity.

Hopefully a LaCerte user can give more info.

[Corduroy Frog]

Loan

If indeed this is a partnership and not a single-member LLC, the 1065 is the right form.

And it follows that for a partnership, the basis is increased by any loans guaranteed by the partner. (Not so with an S corp)

For purposes of discussion assume there are 4 partners, and a loan for $400,000 guaranteed by each of the partners. One of the partners thus can increase his basis by $100,000. This can help accommodate a loss.

Bear in mind, also, a couple of features:
1) The $100,000 is not forever -- it reduces as the principle is paid off by the
partnership.
2) If one of the partners is not signatory to the $400,000, he is not at risk
with respect to his share of the $100,000 and cannot have it added to basis.

Maybe this helps --

[sray0713]

Additional information

Yes, this is a multi-member LLC. This is some great information.....I just have not done a lot of these and so I am getting my mind wrapped around it again. So, when a guaranteed loan is received, this will increase their basis, and is this in regards to inside, outside or both basis or is there a distinction between "at-risk basis" and any other basis? Again, thanks for the information, please mention anything else..this is great, really helps me out!!

[Corduroy Frog]

No Taxability Basis

For purposes of what you're discussing, the partnership does not have
a "basis" because the partnership is not being taxed. Of course, if the
partnership buys an asset, it will have basis in that asset for determining
future gain/loss, but the taxability of the partnership flows through to the
shareholders through a K-1 document.

So the loan principle becomes basis to the partners and irrevelant to the
partnership.

Sounds like you're new at this, so I will also advise that you should
report ordinary income and loss from that type of entity on line 2 of the
K-1, "Net Rental Real Estate Income (Loss)" and NOT on line 1,
"Ordinary business income (loss)". Needs to flow through to the partners
in this fashion.so the partners can enter it on form 8582 if required.

[Bees Knees]

The issue with an LLC has to do with at-risk basis for each partner (member). As a partnership, all partnership liabilities increase the partner’s basis. But with an LLC, a partnership liability does not increase the at-risk basis, unless the LLC member personally guarantees the partnership debt. It is possible that only one member needed to personally guarantee the debt in order to get the loan from the mortgage company. You need to find out if your client was one of the partners that did actually guarantee the debt, otherwise, your client gets no basis in the debt, and losses passed through are suspended under the at-risk rules.

[Davc]

The issue with an LLC has to do with at-risk basis for each partner (member). As a partnership, all partnership liabilities increase the partner’s basis. But with an LLC, a partnership liability does not increase the at-risk basis, unless the LLC member personally guarantees the partnership debt. It is possible that only one member needed to personally guarantee the debt in order to get the loan from the mortgage company. You need to find out if your client was one of the partners that did actually guarantee the debt, otherwise, your client gets no basis in the debt, and losses passed through are suspended under the at-risk rules.

Non-recourse debt does not increase anyones basis unless it is "qualified non-recourse debt".